Raising kids with wealth
Don't run away from the hard questions
One of the questions often asked by wealthy families is: How much should I give my children? The answer to that question is directly related to both their readiness to manage and steward the gifted assets prudently and whether the gift aligns with your family’s values. Being able to articulate the values behind the family’s wealth is paramount. Said differently: Why are you giving at this time and in this way? What is the purpose of your wealth?
As Ellen Perry, BBH Senior Advisor, writes in A Wealth of Possibilities: Navigating Family, Money, and Legacy:
"Strong, healthy families generally have well-defined, clearly articulated, life-affirming values. In such families, values are discussed openly, lived enthusiastically, constitute the organizing principle of family life, and define the nature and quality of many family relationships."
These values should also be the organizing principle of your wealth – both how you use it during your lifetime and how you plan for its distribution (to children, grandchildren, charity, etc.) in the future. Articulating the purpose – the why – behind a gift helps the next generation understand the planning and thinking of those who came before them, and it also helps them perpetuate those values in their own lives, including in how they use their resources, inherited and otherwise.
The words and actions of parents, grandparents, aunts, uncles, mentors and teachers of the next generation have an impact on creating thoughtful, responsible adults who understand how to make good decisions about wealth. To help the next generation understand both how and why to steward wealth responsibly, it is critical to create a communication plan grounded in your family’s core values. To do so, here are the strategies we have found to be most helpful.
The money messages and lessons we hear as children and young adults, as well as the behavior we witness within our own families and communities, influence our life-long decisions about how to spend, save, invest, and give. Learning about wealth and values starts early, often alongside formative experiences. Early memories of spending and saving decisions likely hail from your elementary school years and were influenced by the economic conditions of your family and the world around you. The best way for children to understand wealth’s value and purpose is to be included in spending discussions and then to be allowed to make spending and saving decisions on their own – all in an age-appropriate manner. These critical life skills cannot be taught through a financial literacy course or the occasional family meeting; they must be ingrained in children through a lifetime of small, consistent lessons.
Parents who raise financially responsible children focus on two life skills: delayed gratification and independence. Teaching children to exercise willpower and to behave and think independently of others, including their parents, is challenging, especially in families with relatively unconstrained resources, and requires a proactive plan. Lessons about spending, saving, and giving start in preschool and continue through emerging adulthood. In each stage, there are three key components: distinguishing wants from needs, spending and saving wisely, and giving back. Raising responsible children is a lifelong endeavor. It encompasses discussions with a child about whether to
purchase something small each time she receives an allowance or saving money for something big in the future, as well as conversations with a college graduate about the importance of budgeting.
Don’t Fear the Hard Questions
Kids have many questions about money, and the questions usually become more complex as the kids get older. These hard questions can be daunting! However, they also provide clues. These questions might be a window into a child’s thought process. While talking about money is taboo for adults in most situations, it is not for kids. They are likely to have conversations around the lunchroom table, and they might not be able to digest or fully understand some of what they are hearing. Older kids, especially those going away to school for the first time, might have insight into what their peers have and how they live in a different way.
It is okay, and even helpful at times, to admit that you are uncomfortable and don’t have all the answers. For example: “Dad and I are so lucky and have earned significant wealth. We didn’t grow up with wealth, and we don’t know yet what we want to do with it. We want it to help and not burden our family, and we are still working though the decisions about how much to give away, how much to spend, and how much to share.” When a tough question comes up, the key is not to shut down your child – it’s normal and healthy for kids to be curious – but to be open to hearing their inquiries and transparent about why you are or are not answering the questions.
For young adults, 20- or 30-somethings who might be planning their own families in the near future, these questions might indicate that they are grappling with their own financial future. Parental decisions about wealth have real impact in this phase of life, and parents should strive for transparency. Wealthy families cover the spectrum in how they choose to benefit adult children – from giving them nothing beyond a good education to allowing them to access very substantial wealth. For most, the answer lies somewhere between these options: paying grandchildren’s tuition, depositing money into a savings account on a recurring basis, helping with a down payment, or providing startup capital for an entrepreneurial endeavor. Whatever your decision, try to be clear in your intention and not create false tests or hold the decision hostage until the right time. These types of financial support are gifts. A gift is something given voluntarily and out of caring, not a bargaining chip. “I will pay tuition for Junior only if he attends my alma mater” is a form of financial coercion, which does not create gratitude or connection in families.
Be a Responsible Role Model
While children learn values and behaviors by hearing the stories and the lessons conveyed by their ancestors, they also learn from watching closely. In 2018, the Women’s Philanthropy Institute (WPI) at the Lilly School of Philanthropy at Indiana University conducted a study on how children learn the value of generosity. The research shows that adult children whose parents give to charity are more likely to be philanthropic themselves. Seeing the value in action matters. However, it matters more to girls. WPI found that modeling the value has a greater impact on girls than boys, who learn more from hearing the value articulated. Our girls are watching closely. Our boys are listening. Both matter.
One way to gauge what children are seeing and hearing is to make a quick list of your top three values. Then look back at your calendar and consider how you have spent your time over the last week. Are your actions aligned with what you care about most? The difference between your stated values and what is in your calendar might uncover the difference between operational values and aspirational values. Aspirational values are the values we might write in a family mission statement – those we aspire to. Operational values, however, are revealed in our actions, including how we spend and manage money – they drive how we make decisions. An observer of our daily habits and behaviors is able to discern our operational values very clearly.
Don’t Underestimate the Public Domain
The 17th time your child asks how much money you have, you will be tempted to give in and make up some fictional number simply to get him or her to stop badgering you. Instead, take a deep breath and resist the impulse to lie. Refusing to share or discuss information that a child might already know through other means – like Google – will cause them to seek answers elsewhere.
We have worked with many private business owners who are forced to confront this issue during a sale process. For example, consider a family who sold their business for a considerable sum when the children were in high school. They shied away from sharing the news with their children for good reasons – they did not want them to feel entitled to the money or less motivated to excel. When the sale was announced publicly, the very knowledgeable friends of these teenagers enthusiastically shared the news. Instead of feeling excited about the family’s newfound wealth, these young people were overcome with worry. Their parents would be unemployed! They did not have enough information to fully appreciate the economic consequences of the sale of the family business. Kids might also feel as if their parents do not trust them when they are misdirected or shielded from certain information.
Listen So Your Child Can Think
Listening is almost too simple, too cliché, to include in this list. However, listening can be much deeper than merely pausing your lecture for a moment to see if your audience is still conscious. In listening deeply, parents can be their children’s most important thought partners as they grapple with increasingly complex questions around personal finance the appropriate purpose and use of money.
In her book Time to Think: Listening to Ignite the Human Mind, author Nancy Kline examines the power of active listening and above all, not interrupting. She has labeled this state of active listening “the thinking environment.” Instead of telling the people in our lives what to think, she recommends helping them think for themselves. This is exactly what we want our kids to do when it comes to being responsible and thoughtful with wealth – be able to think capably for themselves in order to make good decisions over the course of a lifetime. When a child faces a financial challenge or decision, parents are often quick to try to solve the problem or give advice. However, Kline cautions against immediately giving advice or direction.
When a child comes to an understanding or decision herself, with the help of a listening partner, the lesson is much more likely to stick. The next time the opportunity presents itself, listen first – and perhaps for longer than you are inclined to initially.
Let Them Fail Small
To teach children to be successful, financially responsible decision-makers, giving them independence to make decisions about money is critical. Sometimes this means they will make the wrong decision and then have to cope with the consequences. Failure is an important part of the learning process. However, just as teaching a child to ride a bike does not begin by putting them on a challenging rocky trail for their first ride, financial education should not start with large dollar amounts or a significant trust. Start small and build from there.
The first time you give a young child a crisp $5 bill as her weekly allowance, she may lose it or spend it unwisely. This small failure will likely result in tears, but there is no substitute for the experience. The next week, she will likely think twice about carrying the $5 around in her hand or spending it at the first opportunity. Giving a child the freedom to make age-appropriate choices is important; allow her to make mistakes and, most important, to learn from them when the stakes are relatively low.
Of course, parents rightfully want their children to feel safe and secure. If something disastrous happens, a month-long illness or loss of a job in an economic downturn, many parents want their children to know there will be a parental safety net. This security allows children to take responsible risks. But there is a big difference between a safety net and a free ride. The real opportunity for failure – in age-appropriate ways that do not have lifelong ramifications – is fundamental to learning how to responsibly manage wealth.
Work for It
Having access to wealth created by others does not create a sense of achievement or accomplishment. In fact, it can reduce a child’s sense of purpose or meaning – depriving them of the opportunity to succeed in their own right. In her book Raised Healthy, Wealthy & Wise, Coventry Edwards- Pitt posits: “[The] ultimate question for affluent parents is: How do we instill the desire to work – and the will to work through tough times – in children who don’t need to work for money?” One answer is to reduce their access to your money. Reducing parental financial involvement – at an appropriate age – provides a chance for children to work to pay their bills and have the things they want. Parents can provide children the need to work.
However, they should also set the expectation that they have to work. It is often tempting for wealthy families to opt for enrichment activities or travel in the summers, but parenting experts are adamant about the value of requiring a “real” summer job for high school and college-aged kids. Coventry-Pitt writes about the values of real work at length: “It is not good enough to simply talk about work, or even to model a good work ethic. Children need to experience the real world of work for themselves.” A real job means one that they obtain for themselves and is not bestowed by a family friend or created for their benefit. “Real work involves interaction with the outside world when you are held accountable on the basis of how you perform rather than who you are or where you come from.” Persevering and ultimately succeeding in this type of work is what helps kids learn grit and resilience. Real work will also teach them what is required to reach financial independence.
It Is Never Too Late
So often we hear from parents who think that it is too late. They (or their adult children) are unredeemable because they did not start teaching these ideals early enough or they didn’t model the right behavior at the right time. It’s not too late! Bad behavior happens – everyone has made a bad choice with money at some point. The question is: How do you stop a pattern and change course?
The first step is acknowledging that “we are on the wrong path.” The second step is communicating course correction: “As your parents, we don’t think we have set the right tone for how we think money should be used. Let’s rethink it, starting with what matters most to us as a family.” The conversation starts with values, which can then serve as a north star for a family’s financial plan, including allowances for young children, estate planning, and philanthropy.
Adrienne M. Penta is managing director of Private Banking, Center for Women & Wealth at Brown Brothers Harriman